Canada's Fairfax urges caution on markets and economic outlook

TORONTO Feb 13 (Reuters) - Fairfax Financial Holdings Ltd
said on Friday investors ought to be wary about
financial markets and the global economic outlook, as the huge
oil price slide over the last six months has led to a global
deflationary environment.

The Toronto-based financial services holding company, led by
well known contrarian investor Prem Watsa, on Thursday reported
a record annual profit of $1.6 billion and solid cash balances,
sending its shares up 1 percent to C$641.57 on Friday.

The results prompted Cormark Securities analyst Jeff Fenwick
to boost his price target on Fairfax to C$740 from C$575 and his
rating on the stock to a "buy" from "market perform." He noted
that the company continues to produce strong investment gains,
despite a defensive investment positioning.

Watsa, a devotee of the value investing style favored by
Warren Buffett, made billions for Fairfax by correctly calling
the 2008 financial crisis. But he missed out on some of the
subsequent stock market rally by hedging the company's equity
exposure.

Asked on conference call on Friday about the firm's
defensive positions and decision not to further deploy some of
its cash at this time, Watsa said Fairfax was on the sidelines
as it does not currently see enough opportunity.

"Every time we buy a stock or a bond, we are looking for
protection on the downside and right now our view is there is
very little protection on the downside," said Watsa.

He noted that the price of oil dropping from $100 a barrel
to $50 a barrel was totally unexpected for most people, but said
Fairfax had warned in its annual report last year that commodity
prices could collapse.

"The price of oil coming down we think is not only (due to)
supply in the United States, but it also reflects decreasing
demand from China," said Watsa.

He argued that the decline in oil is not an isolated event
impacting just one sector, but one with much deeper implications
for the global economic environment. He sees many people,
including some central bank heads, being caught off guard by the
extent of the deflationary risk.

"In 2006-07, you may have thought we were totally wrong, but
of course things changed in 2008 and some companies did not make
it," he said. "We don't want to ever be in a position like that.
We think that there are a lot of unintended consequences here."
(Reporting by Euan Rocha)